The Independent Market Observer

Pay Attention When the Job Growth Dog Barks

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Mar 29, 2023 2:10:50 PM

and tagged Commentary

Leave a comment

recession-eThere has been surprisingly little worry reported by advisors and readers in the past couple of weeks. With the headlines in play—bank failures, a recession coming, commercial real estate starting to crash, and so forth—I would have expected more concerns. But it seems that people are realizing that, despite all the headlines, things are actually not all that bad.

What’s Going On?

For example, consumer confidence ticked up the other day, driven by better expectations for the future. Not only do people feel pretty good today, they’re also starting to feel better about what’s ahead. There are now stories coming out about how, in the Midwest in particular for some reason, people simply don’t care about the negative headlines and are out there working, spending, and having fun. As long as the jobs are there, according to the headlines, people are getting on with their lives.

This leaves our community here with a bit of a split. I had been in the “no recession” camp for a while, driven by the strong labor market (just as those Midwest headlines are calling out). With the banking situation (I won’t call it a crisis), however, I have moved over to the recession camp, as banks will be cutting back on lending and making it harder to borrow. So, in that sense, I am more concerned. At the same time, many folks seem to be less concerned overall. I am getting fewer calls for collapse, although I am still getting worries about a pending recession. What’s going on?

Soft Landing Ahead?

The right answer, as usual, is somewhere in the middle. As banks pull back to rebuild their capital base, we will see slower growth. On balance, this is a good thing. Tighter financial conditions from the banks make it less necessary for the Fed to keep raising rates. The economic effect of those tighter conditions will also be offset by the strong labor market, although not completely. In other words, while we likely will get a recession, it will be a mild one—and one that doesn’t really hit the average person.

This result is, in many respects, the soft landing we have all been hoping for. Slower growth, driven by tighter financial conditions: check, as this is what the Fed has been aiming for. Continued strength in the job market, with everyone working and able to pay their bills: check. Lower inflation, driven by that slower growth: check. It’s not bad when looked at that way.

This scenario is also consistent with the less apocalyptic headlines and with the data. When headlines express worry about the banking system, they are saying banks are weak and will pull back: check. Weak banks mean slower growth: check. But with job growth still strong and consumer confidence up, the average person is still doing well.

Job Growth Dog Is Sound Asleep

You will notice that the piece that makes all this work is job growth, and that is what I will continue to watch. We can have a financial recession, driven by the banking system, that the average person will ride out comfortably, if job growth holds. Right now, that is the case. When the job growth dog barks? Then we will need to pay attention. But that dog is still sound asleep.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®